Path Dependency (coined by economists like Paul David in his 1985 QWERTY paper and W. Brian Arthur's 1989 Economic Journal piece), explains how choices made in the past limit the choices available in the present.
Path dependency usually means we stay on a path because switching is costly. This post argues something stronger: that the regime is actively defended by actors who profit from it.
The key point in the past was when Debt Financing became the major factor. When and how it happened is the interesting question.
Imagine you are in The Era of Pure Shareholder Financing (c. 1000 – 1612)
During the High Middle Ages and the Age of Discovery, long-distance trade operated almost entirely on upfront, risk-sharing equity contracts rather than long-term corporate debt.
The Medieval Era (11th–15th Centuries)
Originating in Italian maritime cities like Venice and Genoa was the single-voyage partnership. A sedentary investor put up 100% of the upfront capital, while a traveling merchant risked their life and labor. If the ship sank, the investor lost their gold and the merchant owed nothing. If it succeeded, profits were split (typically 75% to the investor, 25% to the merchant), and the contract dissolved.
Usury Prohibitions Reinforced Equity
The Catholic Church strictly banned charging interest (usury) during the Middle Ages, though many workarounds existed; most financiers therefore structured investments as equity partnerships rather than interest-bearing debt.
Early Joint-Stock Voyages (1550s–1612)
Early expeditions like the English Muscovy Company (1555), the English East India Company (1600) pooled upfront equity from dozens of merchants for a single voyage. When the ships returned to port, the spices were auctioned, capital and profits were distributed, and the ledger was wiped clean.
Then came The Turning Point: Permanent Capital & Debt (1612 – 1700s)
The end of the pure, single-venture equity era began in the early 17th century when global trade required permanent forts, standing navies, and multi-year supply chains that a single voyage could not fund.
Founded in 1602, the Dutch East India Company (VOC) was expected to liquidate its capital after 10 years. In 1612, the directors refused to pay back the initial capital, locking the equity into the company permanently. Because investors could no longer cash out at the end of a voyage, the Amsterdam Stock Exchange became a secondary market where shares were traded.
Once companies gained "perpetual life," they could borrow money against future decades of revenue. By 1617, the VOC began borrowing against future revenue to fund warfare and expansion. Similarly, the English East India Company abandoned per-voyage accounting for permanent capital in 1657, opening the floodgates to long-term debt financing.
Finally came The Birth of Modern Limited Liability (1811 – 1855)
Before the 19th century, incorporating a company with limited liability required a special royal charter or an act of parliament—typically reserved for state-backed monopolies. Ordinary businesses operated as partnerships with unlimited liability, meaning if a business took on debt and failed, creditors could seize the owners' personal homes and throw them in debtors' prison.
Because personal ruin was on the line, ordinary business owners avoided massive long-term debt until the law changed:
1811 (The First General Law). New York State passed An Act Relative to Incorporations For Manufacturing Purposes. The world's first law allowing ordinary manufacturing businesses to incorporate with limited liability without needing a special legislative favor, though it was heavily restricted in scope to specific essential goods used in manufacturing. It also specified certain pro-rata liability.
1855 (The Industrial Floodgate). In Britain, the heart of the Industrial Revolution, the Limited Liability Act 1855 (followed by the Joint Stock Companies Act 1856) made limited liability available to the general public. Parliament initially resisted this fiercely, fearing that shielding owners from debt would destroy business morality and encourage reckless speculation.
This is The Pivot Point to our present regime. 1612 made permanent debt possible; 1855 made it safe for ordinary owners. The two together—not either alone—built the regime we live in. Once 1855 disconnected the personal wealth of shareholders from the debts of the corporation, borrowing larger sums of money became available to the individuals running the enterprise.
The Well-intentioned Laws, Working as Designed
The Machine's Incentives
Executives have a fiduciary duty to maximize shareholder value. Even if a CEO wants to slow down, accept lower profits, or acknowledge ecological and social limits, the system will discourage it. Wall Street replaces him with someone who will keep the growth projections alive. Such behavior is rational in the present regime; it is a job requirement.
The ecosystem including for example bankers, consultants, lawyers, brokers, and FinTech do not produce physical goods like food or shelter; they extract fees by managing the friction and complexity of the debt machine.
Investment bankers and brokers profit by packaging future assumptions into tradable debt (bonds, derivatives, securitized loans). The bigger the debt, the bigger their upfront fee.
Management consultants provide the "expert" spreadsheets and mathematical justification that validate the regime's unrealistic assumptions, giving executives plausible deniability when things fail.
Corporate lawyers build the intricate shields of limited liability, shell companies, and tax havens that ensure the sponsors keep the upside while the public absorbs the downside.
The latest layer, FinTech, using algorithms and high-frequency digital rails to accelerate the velocity of debt and credit, making extraction instantaneous and frictionless.
The Machine's Blind Spots
We built an immortal, limited-liability machine powered by mortal humans with unlimited desires. The economic geographer Bent Flyvbjerg wrote about Strategic Misrepresentation as the deliberate, systematic distortion of project data—underestimating costs and overestimating benefits—to get a project approved and financed. He recognized the possible cognitive bias of optimism. The deliberate version matters here because it is rational under the current regime—understating costs is how projects get financed.
To make a financial model yield a high ROI, engineers and financial analysts systematically delete "fat-tail" events (rare, catastrophic, once-in-a-millennium disasters) from their spreadsheets. All decision-making (especially with the long-term commitments) requires certainty in assumptions. The consultants (e.g. engineering, architectural, accounting, taxation, legal) give definitive conclusions.
These are all instances of individual rationality—a banker whose bonus is paid on origination volume has no incentive to price tail risk—distinct from systemic outcomes such as fragility and fat-tail blindness. These are goals that are allowed under our current regime of law, finance, economics, and consultancy.
We should note that these actors do provide system wide benefits such as liquidity provision and risk pooling. The greater number of participants does markedly increase the ability to finance the projects and also spread—though not necessarily reduce—the risks across multiple financiers.
The ROI (Return On Investment) to the individuals is positive. But consider Joseph Tainter, whose 1988 book The Collapse of Complex Societies says the initial complexities are highly rewarding —the first bridge across a river returns far more than the fiftieth. Tainter's thesis is contested; complexity sometimes buys resilience. Has the current ROI for our civilization turned negative?
Are the enterprise and project debt-financing stretching decades into the future a form of restriction that prevents a change of course? Since practically all paradigm changes will negatively affect the actors above?
(We will examine an interesting example on the Fukushima Nuclear Reactor in the next post. We will ask if the rigidity against new alternative paradigms, in our current regime, may put us in danger of "throwing out the baby with the bath water"?)
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